>> we are insolvent. >> it is happening from coast-to-coast. >> the city that kept issuing debt. >> bankrupt cities. >> stockton is falling apart. it is a horrible thing to see. >> sinkholes of waste. corruption. and crime. >> what words would you use to describe the financial situation? >> oh, hopeless. >> hopeless? >> hopeless. >> who is to blame? >> these were all his ideas on the taxpayers trusted him. >> who will have to pay? >> the salaries and benefits have to be renegotiated. >> you bet. >> why has that not happened yet? >> what is the fix? >> when we come together as a city there is nothing we can't

accomplish. >> fox news reporting cities going broke. reporting from wall street in new york city here is bret baier. >> this hour we will take you inside an alarming trend. cities that have slid deep into debt. even bankruptcy. new york is not on the list today but for a number of other reasons we begin our report from this spot, america's financial nerve center. the first reason is simple. some of the nation's most desperate cities are in trouble because of the millions they have borrowed from wall street. we saw that 171 miles from here in a city buried under decades of debt. >> harrisburg, pennsylvania, is the capital of the keystone state. you would think it had been run by the keystone cops. >> what exactly is the fiscal situation in harrisburg now? >> well, number one we are insolvent. >> dan miller is harrisburg's controller. >> my office is projecting that we would have a $15 million deficit this year and i think

we are just going to struggle from pay check to pay check. we have $1.6 million. we have a health insurance bill that needs to be paid and our payroll every two weeks is a million dollars. i mean there you go. if we make payroll next week and pay that bill we have no more money. a bleak situation. >> bleak. that about captures it. harrisburg is deep in hop to wall street and can't make the payments on millions of dollars on bonds. it has gotten so bad harrisburg doesn't even have a credit rating any more. >> it is difficult to sell homes, people aren't moving into the city. businesses don't want to locate here. >> how did it come to this? the story begins in november of 1981 when voters elected democrat steven reid mayor. he would remain in office 28 years, a tenure marked bay public building boom, financed bay series of big debt deals with wall street. the first in 1986. heaharrisburg borrow $390 milln

to build a hydroelectric dam and then regulate the waterfront. reid could move ahead with the waterfront project. part of his vision to turn harrisburg into a national tourist destination that included a new $1.6 million baseball stadium to lure a minor league franchise to town. years later when the senators threatened to jump to another city, harrisburg issued bonds to buy the team. its price tag? $6.7 million. then there was reid about's attempt at a wild west my you see yum. he spent $8 million over 16 years on artifacts from six-shooters to doc holliday about's cane. much of the collection is still stored in this warehouse. the museum never opened. the national civil war museum

did hope in 2001 at a cost of more than 30 million. >> you have all that together in one town, wow, you are a nationally scaled national class tourism attraction. >> democrat linda thompson was on city council from 2002 through 21s 2010. >> these were his explanations when was challenged ton. >> but the challenges really wouldn't come until harrisburg's finances collapsed under its most expensive falling. >> this incinerator was the biggest problem for criminal them. in never worked like it was supposed to. it has burned up hundreds of millions of dollars and some people now call this the incinerator from hell. originally built in 1972 before reid took office the plant was supposed to generate profit by charging fees to burn garbage. it didn't work out that way.

mechanical problems shut it down. pa multiple times.ultiple >> the city had to decide do we incur more debt to get the it running again or just sell it and get rid of it. the city enured mor incurred m. in 2003 there was $100 million of debt outstanding. within four years there was $326 million. on an insin rater that probably could carry $100 million if it was operating properly. >> that debt crippled harrisburg. which unkovich says scrambled for cash whereever it could find it. for example he says to make extra money the city started overcharging sewer customers for administration costs while it let century old pipes

collapse. >> it is not unusual to have the sinkholes directly related to incurring the debt for the incinerate. used the money from the incinerator bonds for other projects. how was he able to do that? >> by moving money around in different funds. i can't tell you what money he moved where other than he did. so for example if you want to start a museum, rather than going to city council and put $500,000 in the budget you issue bonds for an incinerator and take a portion to get money for a purpose that he he may not be able to get azoved if he just goes through the normal budgeting process. >> that doesn't seem legal. is it? >> i don't know. it is certainly questionable. >> as a member of city council you voted for the incinerator debt? >> yes, i did. >> that was a bad idea. >> as it was sold to us, no. we hired our own professional consultants who told us it would pay for itself.

>> you regret that now? >> i egreet that wi regret than the consultants. >> no authority fees, fund,s funding or income shall be applied to purchase artifacts or to benefit any city museum or related projects. >> yeah. >> the situation had gone from fiscal tragedy to farce. while the council scuddled the hall of fame next door to the baseball stadium the city did go along with a face lift to the ballpark itself which would send taxpayers deeper in debt. follow this one. harrisburg sold the senators at a $7 million profit but then turned around and borrowed $18 million for stadium upgrades. >> do you take some of the blame here? >> my responsibility started back then.

i began to sound the alarm about this leadership and the final responsibility i took on was i ran against him and unseated h him. >> a private citizen since 2010, reed did not respond to multiple interview requests over several weeks via phone and e-mail. so we dropped by his house. and the building where he has an office. >> he is not in the office right now. >> within hours reed contacted us by e-mail. he claim the his various tourism initiatives boosted harrisburg's economy and that he did nothing wrong to pay for them. as for the incinerator reed noted it "was approved by all governing bodies." he also wrote he had a workable plan to wipe out the incinerator debt but that "city council stopped the process dead in its tracks." he turned down our request to speak to us on camera?

>> he was likeable and a smart man and taxpayers believed in his leadership and they trusted him. >> and he left them with a mess. the question now, how to deal with it. the state appointed receiver put together his plan to pay back the debt by, mock other things, raising harrisburg's earned income tax and leasing out some of its parking garages. mayor thompson got behind that plan. controller dan miller and the city council, however, don't think harrisburg residents should be the only ones making concessions at this point. they want a bankruptcy court to sort it all out. >> what do you say to people who say that is a copout? >> the reality is you can only get so much blood from a turnip. >> this man doesn't want to hear it. dominik fred rico. the ceo of insured guarantee which has insured the harrisburg bond os. theyville to pea off th will he investors. >> on the bond deals even if the project goes kaput that the

government is still on the line to pay what is due? >> they make us an absolute promise to pay. full faith and credit is the term that is typically used. >> so they are on the line for it. >> if you give me your full faith and credit are you on the line? >> of course. >> okay. >> last october the council filed for bankruptcy but its petition was rejected because thompson the mayor refused to sign it. now, miller is running against her in next year's primary. dave unkovich on the other hand is done tending to harrisburg. resigning in frustration. >> we are at a point where you literally could not kick the can down the road. so broke than you just need to deal with the problem. >> now. >> yes, now. >> up next, the battle over pensions and benefits. fox business network's lou dobbs with that story, after the break. this happy couple used capital one venture miles for their "destination wedding."

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welcome back. as you have seen, cities with big dreams and big bills have come here to wall street for the cash to finance them. but even more towns are going broke not by issuing bonds is but by issuing promises to public employee unions. that story has a new york angle, too. fox business network's lou dobbs explains. >> but it is a good natured sort of labor battle. it was in 1935 that president franklin roosevelt made it easier for workers in the private sector to create unions. when signed the wagner act he see he meanted and deepened political ties between organized labor on the democratic party. >> it doesn't pool enthusiasm for picketing. >> even fdr didn't think public sector unions made any sense. >> collective bar gaining is different for public workers because their boss is really on

their side. >> lies extensively on the roots of america's economic problems. >> they don't want to pay the union mihms too much because it comes out of their own pockets at ford, but that is not true of the government. >> strikes by public employees would be quote the unthinkable and intolerable. but it was within a couple of decades that democratic heirs decided the political upside of public sector unions was worth the risk. the euro caucuse eureka momentd right here in new york city. municipal workers granted the right to bargain collectively. three years later those public unions organize today's reelect him. wagner's unexpectedly strong

showing caught the attention of another democrat worried about reelection. president john f. kennedy. >> he sees how this carried wagner to victory and issues an executive order allowing for the unionization of federal employees. state and local governments picked this up as a cue and you have the rapid growth from there on of public sector unions across the country. >> historian fred siegel of the manhattan institute says the new unions almost invariably worked to elect democrats. >> pay increases and pension increases and healthcare increases. meanwhile the union takes some of the money it gets from the city and invests in local elections. so it continues to elect people who will give the unions what it wants. >> and they also became a political force unto themselves. >> you can't act without their cooperation. >> that is because when elected officials didn't cooperate the public sector unions that fdr

warned about declared those unthinkable strikes. the most memorable case, the summer of 1975 when new york was close to bankruptcy. sanitation workers let garbage pile up in the streets while laid off police marched and shut down the brook le brookly. public employee unions demonstrated nationally when they helped senator ted kennedy challenge to a sitting democratic president they didn't like, jimmy cart. the public sector unions become the get out the vote machine that the old democratic party machine once was. >> carter was renominated but lost to ronald reagan who had the is support of at least one public is sector union, the air traffic controllers. that wouldn't last. months later the controllers rejected a government contract offer they went on strike. but that was not allowed under

federal law and president regan fired them all. >> but we cannot compare are labor management relations in the private sector with government. government has to provide without interruption the protective services which are government's reason for being. >> it is not surprising public unions ally with democrats as providence rhode island fire department union president paul dowdy. >> if you look just generally at the republican party. they believe in a smaller government. as a government worker i don't know necessarily agree with that. >> by the 2* 2008 election, a former community organizer with long ties to one of the largest government employee unions of all -- >> i spent my entire adult life working with sciu. >> a financial crisis would catapult their man to the white house. but it would also bring those

dire warnings about public sector unions from fdr's era. >> union. >> yes! >> back into focus. >> and one other thing, bret. in 2009, public employee unions absolutelily eclipsed the membership of private sector unions. >> thanks a lot. we will see you a bit late. up next, i go across the country to one of those ♪ ♪ lord, you got no reason ♪ you got no right ♪ ♪ i find myself at the wrong place ♪ [ male announcer ] the ram 1500 express. ♪ it says a lot about you. ♪ in a deep, hemi-rumble sort of way. guts. glory. ram. constipated? yeah. mm.

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you have heard why many fear public sector unions could bankrupt cities and states. it is happening right now in california. let's take a trip down route 66. ♪ get your kicks on route 66

>> on old route 66, san bernardino was known as the last stop before l.a. ♪ san bernardino >> with freeways and major railway station it was the ideal hub linking the ports of los angeles and long beach out to the rest of the country. san bernardino symbolized the promise that economic growth held for middle class america. it was even the location of the first mcdonald's. but today, this city of around 210,000 has a shortfall of $46 million. over a quarter of its entire budget. unable to fund enough cuts to close the gap, san bernardino on august 1 filed for bankruptcy. >> you called this a stain on the city? >> oh, yes. >> patrick morris has been mayor of san bernardino since 2006. >> how did sweard ge san bernat into the predict ament?

>> it was a perfect storm economically when this hit in 2006 and 2007 the bottom fell out. >> in the perfect storm, morris says san bernardino property values dropped by 65%. seven car dealerships shuttered and the city lost tens of millions of dollars of sales, income tax and tax receipts. >> we have major cash flow issues. >> he names a great recession. every city in california has been through the great recession. >> republican state assemblyman mike mor morrell rejects morri' perfect storm analogy at least that a sear reof factors came together to devastate the city. >> they had five years of warning that this train was coming down the track. >> that is morell's preferred metaphor. a freight train fueled by

public employees salaries and benefits and it hit town right on schedule. >> approximately 75% of the budget goes towards fire and police officers. they are not going to be able to pay those pensions nor are the salaries they have been paying. >> we have historically in the city been remarkably generous with our labor contracts. >> generous, indeed. in 2010, a san bernardino $317,000rgeant maided 3 h in a city where the average household income is less than $40,000. but it is not just the top salaries that have brought down san bernardino. it is the average ones. >> san bernardino firefighters are making about $130,000 a year. police around $95,000. with pretty generous pensions as well. >> did anybody say hey, you know what, we are not going to be able to afford this down the road? >> those are very problematic

agreements that were made at a time when life looked rosy. >> morris admits it has been in good times and bad that san bernardino's public unions had powerful influence over the politicians. the politicians they help elect. morris says that is just the way its. >> in a blue collar city as old as we are unions have a presence in terms of funding for candidates for are city council and they are present at the table during labor negotiations. >> those negotiations in some cases have bound san bernardino to pay employees just as much even after they retire. >> that is not going to work. it is not going to work. >> you cannot retire people at the age of 50 years with literally full pay and bridge their health benefits until medicare. >> the salaries and benefits you are saying have to be renegotiated. >> you bet. >> why has that not happened yet? >> it will happen under the guidance of chapter 9.

>> in other words, bankruptcy court. but public is sector unions are saying not so fast. they point to state precedence that suggests their pensions are are untouchable. however, morris, a former judge believes that in this unprecedented crisis the courts will allow cities to it modify at least some of their contracts. meanwhile, he is dealing with the day-to-day trials of a city gone belly up. >> now, you don't really have any credit. >> that's right. >> cash for things. >> carry.d kari. >> you vendors who leased equipment who may way to to take that equipment back. >> yes. >> and that is a daily thing? >> we deal with it daily. >> bankruptcy in the short-term is the easier thing to do but the long-term you affect lending condition, housing conditions and jobs. >> and that morrell says will make things worse for the already beleaguered citizens of

san bernardino. >> were there other options? >> there always options. the city could have balanced the budget with a massive cut of services. when you are looking at a city that already cut 20% of its staff that is a really difficult choice to make. >> san bernardino's modernistic dark glass city hall completed in 1972 was once a sign this town was look to the future. today, however, the last stop on route 66 may be on its last legs. >> coming up, the biggest local government bankrupt icy in u.s. history. and it is not in california. ♪ ♪ three, six, nine ♪ the goose dra wine ♪ the monkey chew tobacco on the streetcar line ♪ ♪ ♪ clap, pat, clap your hand ♪ pat it on your partner's hand ♪ ♪ right hand ♪ clap, pat, clap your hand ♪ cross it wi your left arm

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